How 529 College Savings Plans Work

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5.26.23

How 529 College Savings Plans Work

The best thing to happen to college savings in the last several years is the 529 plan, a tax-advantaged savings plan for a child or grandchild to pay for qualified education costs.

How the Plans Work

Once on the 529 plan, assets build up tax-free until they're withdrawn. Withdrawals from state 529 plans will be tax-free if the money is used to pay for qualified education costs. A few common qualified education expenses include:

  • Tuition (K-12 and College)
  • Books and supplies
  • Computers and software
  • Room and board
  • Student loan repayment

Tax Advantages

There is no up-front federal tax deduction for money put in a 529 plan, although some states allow you to deduct contributions on your state tax return. Money builds up tax-sheltered until withdrawn to pay tuition or other educational expenses. Withdrawals from state 529 plans are completely tax-free.

Gift Tax Benefit

The normal limit on tax-free gifts is $17,000 per gift per year. Section 529 allows you to bunch five years of tax-free gifts into one year. Each donor can give $85,000 tax-free to fund a 529 plan—$170,000 in total from a married couple—every five years.

Interested in the potential of a 529 plan? Provident offers a full range of Investment and Retirement Planning services. Seek the guidance of a Provident Financial Consultant021 by calling (800) 656-4096.

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